Our Exploding Federal Budget

The fact that the size of the federal budget as a fraction of our economy at the end of the Clintion administration was about where it was in the  late 1950s and early 1960s and that leading up to the pandemic it was about where it was during the Carter administration is shown in Figure 1.

Figure 1: Federal Outlays as a Percent of GDP, 1930-2019.

Source: Office of Management and Budget (Table 1.2 ),

This figure, which plots total federal outlays as a percent of GDP from 1930 through 2019, shows that in spite of what most people seem to believe:

   The most significant increases in the federal government's role in the economy took place in the 1930s, 1940s, and 1950s.

   Federal Outlays relative to the size of the economy in 2019 (21.0% of GDP) were comparable to those in 1980 (21.1% of GDP).

   The average level of Federal Outlays relative to GDP since 2000 (21.0%) was more than the average in the 1970s (19.4%) and less than it was in the 1980s (21.6%).

This is what our exploding federal budget actually looks like in the real world.

Our Ever-Growing, Out-of-Control Federal Bureaucracy

Figure 2 shows the relationship between the number of Federal Government Employees—Total, Civilian, Military, and Postal—and the Civilian Labor Force and Population of the United States from 1950 through 2014.

Figure 2: Federal Government Employees, 1950-2014.

Source: Bureau of Labor Statistics (A-1 B-1), Office of Personal Management.

As is shown in this figure the Total number of Federal Government Employees (Civilian plus Military) and federal Military employees fell substantially as the Vietnam War wound down and the Cold War came to an end. At the same time, the number of Civilian federal employees has remained relatively constant since 1967 (hovering around three million) in spite of the fact that the Civilian Labor Force has doubled since 1967 and the civilian Population increased by 90%. What's more, Figure 2 clearly shows that Civilian federal employees as a fraction of the workforce has been cut in half since the 1960s and by even more when we include Military employees. Civilian federal employees were 3.7% of the labor force in 1967; they were only 1.8% of the labor force in 2014, and it is worth noting that 22% of all Civilian federal employees worked for the Post Office in 2014 and delivered our mail!

This is what our ever-growing, out-of-control federal bureaucracy actually looks like in the real world.

Our Unbearable Tax Burden

Figure 3: Pew Research Center/USA Today Survey Results,

February 2013.

Source: Pew Research Center

For all categories of expenditures, other than the first three, a larger proportion of the respondents would choose to increase rather than decrease expenditures, and for all categories, even the first three, a majority of those who had an opinion would either increase expenditures or keep them the same. In addition, the three categories for which more respondents would rather decrease than increase—Aid to the world's needy, State Department, and Unemployment aid—sum to just 2% of the federal budget while just five of the categories which more respondents would increase rather than decrease—Social Security, Military defense, Medicare, Health care, and Aid to needy in U.S.—sum to almost 80% of the federal budget. These results suggest that the vast majority of the American public is satisfied with the size of the federal government we have, and, if anything, would like to see it increase rather than decrease. 

These results stand in stark contrast with those of the Pew Research Center/USA Today survey conducted later that same month. In this survey the respondents were asked if the president and Congress should focus on spending cuts, tax increases, or both in order to reduce the federal budget deficit. The results are given in Figure 4.

Figure 4: Pew Research Center/USA Today Survey Results, February 2013.

Source: Pew Research Center/USA Today

Here we find that the overwhelming majority of respondents (73%) said they would like to see the federal deficit problem solved through only (19%) or mostly (54%) spending cuts rather than through only or mostly tax increases.  In other words, an overwhelming majority of the American people would like to have their cake and eat it too; they want to increase the size of the federal government or keep it the same as they solve the deficit problem through only or mostly spending cuts.

The Federal Budget in the Real World

According to the Office of Management and Budget, the federal deficit in 2023 amounted to $1,694 billion. This was equal to 27% of the federal budget. The following chart shows a breakdown of federal expenditures in 2023 with the 27% deficit hole in it.

Figure 5: United States Federal Expenditures, 2023.

Source: Office of Management and Budget (1.1, 3.2 11.3)

^{(Click Here for Graphs since 1960)}

Even a causal examination of this chart reveals that it is impossible to maintain the government the vast majority of the American people seem to want and at the same time reduce the deficit by as much as 27% through mostly spending cuts:

1.  Maintaining our current levels of expenditures on Social Security and Medicare (37% of the budget)—as over 80% of the respondents in the Pew poll say they would chose to do—leaves only 54.5% of the budget to cut after deducting the 8% of the budget that goes to interest on the national debt. It would require a 40% cut in the rest of the budget if we wished to balance the budget through spending cuts and exempt Social Security and Medicare from cuts.

2.  Maintaining our current levels of expenditures on National Defense (13% of the budget)—as over 70% of the respondents in the Pew poll also say they would chose to do—leaves only 31% of the budget to cut after deducting interest on the national debt. A 27% cut in the total budget would require a 87% cut in this 31% in order to balance the budget through spending cuts.

3.  At this point we re left with only 4% of the budget which isn't enough to fund Veterans Benefits (4.8% of the budget)—which over 90% of the respondents in the Pew poll say they would chose to do—which means that at this point nothing else can be funded if we try to fund Veterans Benefits..

Where are these cuts supposed to come from? From eliminating waste, fraud, and abuse? I don't think so!  As I have explained in Waste, Fraud, and Abuse in the Federal Budget, the idea that we can reduce the federal budget even by 10% through eliminating waste, fraud, and abuse only makes sense to those who refused to look at the numbers or are enumerate.

The federal budget has been at the center of the political debate in our country for the past forty years, and, yet, few people seem to understand how the money is spent. As the Pew Research Center and Pew Research Center/USA Today surveys indicate, many, if not most seem to believe that somehow we can cut the budget dramatically, say by as much as 10%, and can thereby save a substantial amount in taxes without having to cut defense or Social Security or Medicare and without cutting those programs that make up our social safety net. At the same time there are those at both ends of the political spectrum who believe we can save a tremendous amount in taxes by cutting defense. (Coburn Sanders) Figure 5 clearly indicates that these beliefs are absurd. Figure 6 and Figure 7 below may help to make this point even more forcefully.

Figure 6 is constructed from OMB's Table 3.1—Outlays by Superfunction and Function. This figure plots a breakdown of the actual, real-world outlays of the federal government in terms of its three largest categories (Superfunctions) from 1940 through 2019: Defense, Human Resources, and Net Interest both as a percent of GDP and of Total Outlays.

Figure 6: Defense, Human Resources, and Net Interest, 1940-2019.

Source: Office of Management and Budget. (3.1 10.1)

The first thing we see when we look at the graphs in this figure is that even though the size of the federal budget has changed very little relative to the economy since the 1950s, the Human Resources component of the budget—those programs that make up our social insurance system including Social Security, Medicare, and the rest of our social safety net—has grown dramatically. It has gone from less than 20% of Total Outlays in the early 1950s to more than 60% in the 2000s and stood at 69% of the federal budget in 2019.

At the same time we see that Defense has decreased just as dramatically, going from over 60% of Total Outlays in the early 1950s to around 20% in the 2000s and stood at 15% in 2019. Meanwhile the third largest category in the budget, Net Interest, has gone from a high of 14% of the Total Outlays in 1948 to a low of 5% in 2009; Net Interest stood at 8% of the budget in 2019.

What is most relevant to the point at hand, however, is what has happened to All Other Outlays and Defense in this graph.

All Other Outlays

All Other Outlays shows us how much the federal government spent on everything other than Defense, Human Resources, and Net Interest.  All Other Outlays consists of such things as expenditures on Energy, Natural Resources and Environment, Transportation, Community and Regional Development, International Affairs, General Science, Space, Technology, Agriculture, Administration of Justice, and General Government—basically, all of the items north of Interest on the National Debt in Figure 5 that do not involve retirement, healthcare, or other social-insurance programs. This residual has gone from a high of 28% of the budget in 1940 to a low of 5% in 1945. It stood at 8% in 2007 before the financial and economic crisis that wrought havoc with the federal budget began and stood at 6% in 2019.

It is obvious—or at least it should be obvious to anyone who looks at the actual, real-world expenditures of the federal government plotted in Figure 5, has even the faintest idea of how the world works (Amy), and who can count—that there is no reason to believe we can save a substantial amount in taxes by cutting the programs in the All Other Outlays category in Figure 6, obviously not enough to reduce the total budget by 10%. The expenditures on programs in this category have already been cut relative to the budget and GDP by more than 60% since 1980, and even if we were to eliminate all of these expenditures completely—which, of course, we can't do and still have a functioning government—we would succeed in reducing the size of the federal budget by less than 6%. It is also worth noting that, relative to the size of our economy, we have already cut the programs in this portion of the budget below where they were in the 1950s.

What do we find when we look at Defense?  

Defense

As for Defense, there may be some room to maneuver if we were to realign our budget priorities away from the military threats we faced twenty-five or thirty years ago and toward those we face today. There is, however, no reason to believe we can solve all of our fiscal problems simply by cutting Defense.  Defense was only 15.1% of Total Outlays in 2015 and 3.2% of GDP in 2019.  Even if we were to cut Defense in half—something that virtually no one would be willing to do—it would reduce the federal budget by less than 8%.

Thus, if we are serious about saving as much as 10% of our total federal taxes, unless we are willing to make draconian cuts in Defense or the rest of the federal budget, we must look to Human Resources. That's where the money is, and it's also where Social Security and Medicare are, as well as the other social-insurance programs that make up our social safety net. The question is:

Does it really make sense in the real world to think we can save a lot of money by cutting Human Resources without cutting Social Security or Medicare and without cutting the programs that make up our social safety net?

Human Resources

The OMB's Table 11.3—Outlays for Payments for Individuals details the bulk of the expenditures contained in the Human Resources category of the budget.  Figure 7 breaks down the items in Table 11.3 into three categories where Retirement/Disability is the sum of all federal expenditures on retirement and disability programs, Healthcare is the sum of all federal expenditures to individuals for healthcare, and Other Human Resources is the total of all government expenditures on all other Human Resources programs.  (For a detailed explanation of each of these categories along with a detailed examination of programs that are included in each category see the expanded discussion of this figure in Understanding The Federal Budget.)

Retirement/Disability

The problem is that when we look at Retirement/Disability we find it is dominated by Social Security in that 76.6% of the total spent on programs in this category of the budget went to Social Security in 2019 while 19.5% went to civil service, military, and railroad retirement/disability programs, and only 1.7% to the Supplemental Security Income (SSI) program.

There is no way to make substantial cuts in this portion of the Human Resources budget without cutting Social Security.  After all, military, civil servants, railroad employees, and other government employees are just as entitled to their retirement/disability benefits as are Social Security recipients, and, in any event, these programs take up only 5.8% of the total budget in 2019.

This leaves the SSI program which was 1.7% of Human Resource expenditures,1.2% of the federal budget and 0.3% of our gross income in 2019. Aside from its insignificance, SSI is the primary social safety-net program that provides for indigent disabled and indigent elderly individuals who are either not eligible for Social Security or whose benefits fall below a subsistence level. Substantial cuts in this program would not only save virtually nothing, it would also tear a huge hole in our social safety net.

What about Healthcare?

Healthcare